Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in world demand for Canada's goods.In the short run,________.In the long run,________.
A)real GDP and the price level both fall; real GDP is below its original level with a lower price level
B)real GDP and the price level both rise; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Question

Quizplus · Accepted Answer

In the short run, an increase in world demand for Canada's goods would lead to an increase in real GDP and the price level due to higher demand for Canadian products. In the long run, the economy would adjust, and real GDP would return to its potential output (original level), but the price level would remain higher due to the initial demand increase.

Suppose Canada's Economy Is in a Long-Run Equilibrium with Real